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Seeking Wisdom: From Darwin to Munger by Peter Bevelin

Through real life examples, many of them centered around Warren Buffett and Charlie Munger, Peter Bevelin helps the reader learn how to think better, make fewer misjudgments and understand ourselves/others better. Discusses mental models, human fallibilities/instincts and human psychology

Key Takeaways

Main goal is to understand why people behave the way they do. “This book focuses on how our thoughts are influenced, why we make misjudgments and tools to improve our thinking. If we understand what influences us, we might avoid certain traps and understand why others act like they do. And if we learn and understand what works and doesn’t work and find some framework for reasoning, we will make better judgments. We can’t eliminate mistakes, but we can prevent those that can really hurt us.”

This book is a compilation of what Bevelin has learned from reading some of the works of the world’s best thinkers

Book is broken down into 4 parts – what influences our thinking, examples of psychological reasons for misjudgments, reasons for misjudgments caused by both psychology and a lack of considering some basic ideas from physics and mathematics and lastly describes tools for better thinking

Too much great information to even try to condense. Just read the damn thing!

What I got out of it

Seriously good read if you’re at all interested in understanding how and why we make decisions (both bad and good) and how we can go about improving our thought processes and tools. Fantastic read and couldn’t recommend more highly

Part 1 – What Influences Our Thinking?

Brain communicates through neurochemicals and genes are the recipe for how we are made

Behavior is influenced by genetic and environmental factors

The flexibility of the brain is amazing as it can change due to our thoughts and experiences

Mental state (situation and experience) and physical state are intimately connected – beliefs have biological consequences, both good and bad

Outlines 28 reasons for misjudgment. These are never exclusive or independent of each other. Many of these echo similar sentiments to Cialdini’s Influence

Bias from mere association

Underestimating the power of rewards and punishment

Underestimating bias from own self-interest and incentives

Self-serving bias

Self-deception and denial

Bias from consistency tendency (only see things that confirm our already formed beliefs)

Bias from deprival syndrome (strongly reacting when something is taken away)

Status quo bias and do-nothing syndrome

Impatience

Bias from envy and jealousy

Distortion by contrast comparison

Bias from anchoring

Over-influence by vivid or the most recent information

Omission and abstract blindness

Bias from reciprocation tendency

Bias from over-influence by liking tendency

Bias from over-influence by social proof

Bias from over-influence by authority

Sensemaking

Reason-respecting

Believing first and doubting later

Memory limitations

Do-something syndrome

Mental confusion from say-something syndrome

Emotional arousal

Mental confusion from stress

mental confusion from physical/psychological pain, the influence of chemicals or diseases

Bias from over-influence by the combined effect of many psychological tendencies working tougher

Behavior can’t be seen as rational/irrational alone – must have context

People can take bad news, but we don’t like it late

Evaluate things, people and situations by their own merits

Past experiences are often context dependent. Just because some stimulus caused you earlier pain, doesn’t mean that is still the case today

Create a negative emotion if you want to end a certain behavior

Good consequences don’t necessarily mean you made a good decision and bad consequences don’t necessarily mean you made a bad one

Frequent rewards, even if smaller, feels better than one large reward

The more “precise” people’s projections about the future are, the more wary you should be

Munger looks for a handful of things in people – integrity, intelligence, experience and dedication

Recognize your limits. How well do you know what you don’t know/ Don’t let your ego determine what you should do

Bad news that is true is better than good news that is false

People associate being wrong as a threat to their self-interest

Labeling technique – when somebody labels you, whether you agree or not, you are more likely to comply and behave in ways consistent with that label

Avoid ideology at all costs

“There is nothing wrong with changing a plan when the situation has changed.” – Seneca

Base decisions on current situations and future consequences

Don’t fall in love with any particular point of view

Know your goals and options

Remember that people respond to immediate crisis and threats

People favor routine behavior over innovative behavior and similarly, people feel worse when they fail as a result of taking action than when they fail from doing nothing

Deciding to do nothing is also a decision. And the cost of doing nothing could be greater than the cost of taking an action

People give more weight to the present than to the future. We seek pleasure today at a cost of what may be better in the future

“We envy those who are near us in time, place, age or reputation.” – Aristotle

“The best way to avoid envy is the deserve the success you get.” – Aristotle

How we value things depends on what we compare them with

Sometimes it is the small, invisible changes that harm us the most

Accurate information is better than dramatic information. Back up vivid stories with facts and numbers

We see only what we have names for

Always look for alternative explanations

We see available information. We don’t see what isn’t reported. Missing information doesn’t draw our attention

A favor or gift is most effective when it is personal, significant and unexpected

Always try to see situations and people from their POV

People tend to like their kin, romantic partners and people similar to them more as well as those who are physically attractive. We also like and trust anything familiar

Concentrate on the issue and what you want to achieve

The vast majority of people would rather be wrong in a group than right in isolation

“It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.” – Ralph Waldo Emerson

When all are accountable, nobody is accountable

Being famous doesn’t give anybody special expertise – beware ads with celebrity endorsements

“We don’t like uncertainty. We have a need to understand and make sense of events. We refuse to accept the unknown. We don’t like the unpredictability and meaninglessness. We therefore seek explanations for why things happen. Especially if they are novel, puzzling or frightening. By finding patterns and causal relationships we get comfort and learn for the future.”

5 W’s – A rule for communication – must tell who was going to do what, where, when and why.

Memory is very selective and fallible – keep records of important events

Don’t confuse activity with results. There is no reason to do a good job with something you shouldn’t do in the first place

“Wise men talk because they have something to say; fools, because they have to say something.” – Plato

Awareness of ignorance is the beginning of wisdom

When we make big decisions, we could compare our expected feelings with those of people who have similar experiences today. In that sense, we are not as unique as we think we are

Understand your emotions and their influence on your behavior. Ask – Is there a reason behind my action?

Hold off on important decisions when you have just gone through an emotional experience

Cooling-off periods help us think things through

Stress increases our suggestibility

Stress is neither good nor bad in itself. It depends on the situation and our interpretation

“I’ve suffered a great many catastrophes in my life. Most of them never happened.” – Mark Twain

People tend to overestimate personal characteristics and motives when we explain the behavior of others and underestimate situational factors like social pressure, roles or things over which there are no control

The less knowledgeable we are about an issue, the more influenced we are by how it is framed

Advice from Munger – can learn to make fewer mistakes than others and how to fix your mistakes faster when you do make them. Were the factors that really govern the interests involved, rationally considered and what are the subconscious influences where the brain at a subconscious level is automatically doing these things – which by and large are useful, but which often mis function. And, take all the main models from psychology and use them as a checklist in reviewing outcomes in complex systems

Part 3 – The Physics and mathematics of Misjudgments

9 Causes of Misjudgment/Mistakes

Systems Thinking

Failing to consider that actions have both intended and unintended consequences. Includes failing to consider secondary and higher order consequences and inevitable implications

Failing to consider the likely reactions of others

Overestimating predictive ability or using unknowable factors in making predictions

Scale and limits

Failing to consider that changes in size or time influence form, function and behavior

Believing cause resembles its effect – a big effect must have a big, complicated cause

Underestimating the influence of randomness in good or bad outcomes

Mistaking an effect for its cause

Attributing an outcome to a single cause when there are multiple

Mistaking correlation for cause

Drawing conclusions about causes from selective data

Invert, always invert! – look at problems backwards

Numbers and their meaning

Looking at isolated numbers – failing to consider relationships and magnitudes. Not differentiating between absolute and relative risk

Underestimating the effect of exponential growth

Underestimating the time value of money\

Probabilities and number of possible outcomes

Underestimating the number of possible outcomes for unwanted events. Includes underestimating the probability and severity of rare or extreme events

Underestimating the chance of common but not publicized events

Believing one can control the outcome of events where chance is involved

Judging financial decisions by evaluating gains and losses instead of final state of wealth and personal value

Failing to consider the consequences of being wrong

Scenarios

Overestimating the probability of scenarios where all of a series of steps must be achieved for a wanted outcome. Also, underestimating the opportunities for failure and what normally happens in similar situations

Underestimating the probability of system failure

Not adding a factor of safety for known and unknown risks

Invest a lot of time into researching and understanding your mistakes

Coincidences and miracles

Underestimating that surprises and improbable events happen, somewhere, sometime to someone, if they have enough opportunities (large enough or time) to happen

Looking for meaning, searching for causes and making up patterns for chance events, especially events that have emotional implications

Failing to consider cases involving the absence of a cause or effect

Reliability of case evidence

Overweighing individual case evidence and under-weighing the prior probability considering the base rate or evidence from many similar cases, random match, false positive or false negative and failing to consider relevant comparison population

Misrepresentative evidence

Failing to consider changes in factors, context or conditions when using past evidence to predict likely future outcomes. Not searching for explanations to why past outcome happened, what is required to make past record continue and what forces change it

Overestimating evidence from a single case or small or unrepresentative samples

Underestimating the influence of chance in performance (success and failure)

Only seeing positive outcomes and paying little or no attention to negative outcomes and prior probabilities

Failing to consider variability of outcomes and their frequency

Failing to consider regression – in any series of events where chance is involved unique outcomes tends to regress back to the average outcome

Post-mortems – Record your mistakes! Instead of forgetting about them, they should be highlighted

What was my original reason for doing something?

What were my assumptions?

How did reality work out relative to my original guess? What worked and what didn’t?

What worked well? What should I do differently? What did I fail to do? What did I miss? What must I learn? What must I stop doing?

Part 4 – Guidelines to Better Thinking

This section helps provide tools which create a foundation for rational thinking

12 Tools for rational thinking

Models of reality

A model is an idea that helps us better understand how the world works. Helps explain “why” and predict “how” people are likely to behave in certain situations

Ask yourself, “Is there anything I can do to make my whole mental process work better? And I [Munger] would say that the habit of mastering multiple models which underlie reality is the best thing you can do…It’s just so much fun – and it works so well.”

A valuable model produces meaningful explanations and predictions of likely future consequences where the cost of being wrong is high

Considering many ideas help us achieve a holistic view. No single discipline has all the answers – need to consider mathematics, physics, chemistry, engineering, biology, psychology and rank and use them in order of their reliability

Must understand how different ideas interact and combine

Can build your own mental models by looking around you and asking why things are happening (or why things are not happening).

Meaning

Truly understand something when “without using the new word which you have just learned, try to rephrase what you have just learned in your own language.”

“Never express yourself more clearly than you are able to think.” – Niels Bohr

Use ideas and terms people understand, that they are familiar with and can relate to

We shouldn’t engage in false precision

Simplification

“If something is too hard, we move on to something else. What could be more simple than that?” – Charlie Munger

Make problems easier to solve. Eliminate everything except the essentials – break down a problem into its components but look at the problem holistically – first dispose of the easy questions

Make fewer but better decisions

Dealing with what’s important forces us to prioritize. There are only a few decisions of real importance. Don’t bother trying to get too much information of no use to explain or predict

Deal with the situations in live by knowing what to avoid. Reducing mistakes by learning what areas, situations and people to avoid is often a better use of time than seeking out new ways of succeeding. Also, it is often simpler to prevent something than to solve it

Shifting mental attention between tasks hugely inefficient. Actions and decisions are simpler when we focus on one thing at a time

Some important things we can’t know. Other things we can know but they are not important

Activity does not correlate with achievement

Rules and filters

Gain more success from avoiding stupid decisions rather than making brilliant ones

Filters help us prioritize and figure out what makes sense. When we know what we want, we need criteria to evaluate alternatives. Try to use as few criteria as necessary to make your judgment. Then rank them in order of their importance and use them as filters

More information does not mean you are better off

Warren Buffet uses 4 criteria as filters

Can I understand it? If it passes this filter then,\

Understanding for Buffett means thinking that he will have a reasonable probability of being able to assess where the business will be in 10 years

Does it look like it has some kind of sustainable advantage? If it passes this filter,

Is the management composed of able and honest people? If it passes this filter,

Is the price right? If it passes this filter, we write a check

Elimination – look for certain things that narrow down the possibilities

Should think about – different issues need different checklists, a checklist must include each critical item necessary for “safety” and avoiding “accidents” so we don’t need to rely on memory for items to be checked, readily usable and easy to use, agree with reality

Avoid excessive reliance on checklists as this can lead to a false sense of security

Goals

How can we make the right decision if we don’t know what we want to achieve? Even if we don’t know what we want, we often know what we don’t want, meaning that our goal can be to avoid certain things

Goals should be – clearly defined, focused on results, concrete, realistic and logical, measurable, tailored to individual needs and subject to change

Goals need target dates and controls stations measuring the degree to which the goal is achieved

Always ask – What end result do I want? What causes that? What factors have a major impact on the outcome? What single factor has the most impact? Do I have the variable(s) needed for the goal to be achieved? What is the best way to achieve my goal? Have I considered what other effects my actions will have that will influence the final outcome?

Alternatives

Opportunity cost – every minute we choose to spend on one thing is a minute unavailable to spend on other things. Every dollar we invest is a dollar unavailable for other available investments

When we decide whether to change something, we should measure it against the best of what we already have

Consequences

Consider secondary and long-term effects of an action

Whenever we install a policy, take an action or evaluate statements, we must trace the consequences – remember four key things:

Pay attention to the whole system, direct and indirect effects

Consequences have implications or more consequences, some which may be unwanted. We can’t estimate all possible consequences but there is at least one unwanted consequence we should look out for,

Consider the effects of feedback, time, scale, repetition, critical thresholds and limits

Different alternatives have different consequences in terms of costs and benefits. Estimate the net effects over time and how desirable these are compared to what we want to achieve

Quantification

How can you evaluate if a decision is intelligent or not if you can’t measure it against a relevant and important yardstick?

We need to understand what is behind the numbers

Buffett says that return on beginning equity capital is the most appropriate measure of single-year managerial performance

Evidence

Evidence helps us prove what is likely to happen or likely to be true or false. Evidence comes from facts, observations, experiences, comparisons and experiments

Occam’s Razor – if we face two possible explanations which make the same predictions, the one based on the least number of unproven assumptions is preferable, until more evidence comes along

Past record is the single best guide

The following questions help decide if past evidence is representative of the future – observation (will past/present behavior continue?), explanation (why did it happen in the past or why does it happen now?), predictability (how representative is the past/present evidence for what is likely to happen in the future?), continuation and change (what is required to make the past/present record continue or to achieve the goal?), certainty and consequences (how certain am I?)

Falsify and disprove – a single piece of evidence against something will show that it is false

Look for evidence that disproves your explanation and don’t spend time on already disproved ideas or arguments or those that can’t be disproved

Engage in self-criticism and question your assumptions

Find your mistakes early and correct them quickly before they cause harm

The mental habit of thinking backward forces objectivity – because one way to think a thing through backwards is to take your initial assumption and say, “let’s try and disprove it.” That is not what most people do with their initial assumption. They try and confirm it.

Backward thinking

Avoid what causes the opposite of what you want to achieve and thinking backwards can help determine what these actions are

Should also make explicitly clear what we want to achieve

“Wise men profit more from fools than fools from wise men; for the wise men shun the mistakes of the fools, but fools do not imitate the successes of the wise.” – Cato

Risk

Reflect on what can go wrong and ask what may cause this to turn into a catastrophe?

Being wrong causes both an actual loss and an opportunity cost

To protect us from all unknowns that lie ahead we can either avoid certain situations, make decisions that work for a wide range of outcomes, have backups or a huge margin of safety

Determine your abilities and limitations. Need to know what we don’t know or are not capable of knowing and avoid those areas

Ask – what is my nature? what motivates me? what is my tolerance for pain and risk? what has given me happiness in the past? what are my talents and skills? what are my limitations?

Be honest – act with integrity and individuality

Trusting people is efficient

Act as an exemplar

Treat people fairly – must be lovable

Don’t take life too seriously – have perspective, a positive attitude, enthusiasm and do what you enjoy

Have reasonable expectations – expect adversity

Live in the present – don’t emphasize the destination so much that you miss the journey. Stay in the present and enjoy life today

Be curious and open minded and always ask “why?”

Appendix

Munger Harvard School Commencement Speech 1986

Avoid drugs, envy, resentment, being unreliable, not learning from other’s mistakes, not standing on shoulders of giants, giving up, not looking at problems from different POVs, only reading/paying attention to information that confirms your own beliefs

Be objective

“Disraeli…learned to give up vengeance as a motivation for action, but he did retain some outlet for resentment by putting the names of people who wronged him on a piece of paper in a drawer. Then, from time to time, he reviewed these names and took pleasure in nothing the way the world had taken his enemies down without his assistance.”

Wisdom from Charles Munger and Warren Buffett

Appeal to other people’s interests over your own

Institutional imperative – tendency to resist change, make less than optimal capital deployment decisions, support foolish initiatives and imitate the actions of peer companies

Board of directors have few incentives (unless large owners) to replace CEO

Type of people to work with – need intellectual honesty and business owners must care who they sell to

Need role models early on

Emulate what you admire in others but also be aware of what you don’t like

Know your circle of competence

Use all available mental models, not just what you’re comfortable with

Scale extremely important – efficiencies, information (recognition), psychology (fit in), and in some industries leads to monopolies and specialization

Disadvantages of scale – specialization often leads to bureaucracy

On what something really means – ask “and then what?” to truly get at somethings core

There is a certain natural tendency to overlook anything that is simple and important

Avoid commodity businesses

Deal only with great people and you will avoid 99% of life’s headaches